Employees
may exclude from gross income the value of
meals furnished by their employer on the
employer's business premises for the
employer's convenience if the meals are
furnished for a substantial noncompensatory
business reason.

In some cases, part or all of the value
of meals may be excluded as de
minimis fringe benefits or qualified
employee discounts.

The value of lodging may be excluded
from an employee's gross income if (1) the
lodging is located on the employer's
business premises; (2) the lodging is
furnished for the employer's convenience;
and (3) the employee is required to accept
the lodging as a condition of employment.
Special rules apply to lodging provided in a
foreign camp and qualified campus housing
provided by an educational institution.

Partners may be
deemed as other than partners for purposes
of services they provide a partnership under
Sec. 707(a). The Fifth Circuit has held
that, as a matter of law, in such a
situation a partner might be able to exclude
meals and lodging furnished by a
partnership; however, other circuits have
held otherwise.

Gross income generally includes the fair market
value (FMV) of meals and lodging received from one's
employer.1 However, Sec. 119 allows
an employee to exclude from gross income the value of
meals and lodging received from an employer under
certain circumstances. In addition, some or all of the
value of meals or lodging may be excluded from income
under other exclusion provisions. This article
explains the general exclusion under Sec. 119(a) and
the other limited exclusions for meals and lodging
received from an employer and addresses whether a
partnership may treat a partner as an employee for
purposes of the Sec. 119(a) exclusion.

Conditions
for Exclusion of Meals by an Employee

For
an employee to exclude the value of meals received
from an employer from gross income under the general
exclusion in Sec. 119(a), the employer must furnish
the meals on the employer's business premises.2 The "employer's
business premises" generally means the
employee's place of employment. For example, for a
household employee, the business premises are the
employer's home.3 The business premises
include the place where the employee performs
significant duties or where the employer conducts a
significant portion of its business.4 Places near the
employer's premises will not qualify, even though
such places might be convenient.5 The business premises of
the employer include any place on the grounds of the
employer and not just the main structure.6 The meals must also be
for the convenience of the employer, not the
convenience of the employee.7

Noncompensatory Business Reason
Requirement

An employee may exclude from gross
income the value of the meals provided free by an
employer only if the employer does so for a
substantial noncompensatory business reason. An
employee may exclude the value of the meals in this
case even if the employer also has an additional,
compensatory reason for providing the free meals.
The employer's statement alone is not sufficient
evidence for the conclusion the employer provided
the meals for a substantial noncompensatory reason.
All the facts and circumstances are relevant to such
a determination.8

Where an
employer requires an employee to accept lodging on
the employer's business premises as a condition of
employment, the law deems any meal the employer
provides free to the employee at the business
premises to be for a substantial noncompensatory
reason.9

An employee may
exclude from gross income the value of small food
items and soft drinks as a de
minimis fringe benefit. In addition, an
employee may exclude from gross income occasional
meals provided in kind or occasional cash received
to buy dinner to allow the employee to work
overtime.10 The same treatment may
be extended to food and drinks provided by the
employer to employees and their guests at picnics
and parties.

Meals Before and
After Work

With some exceptions, the law
treats meals provided immediately before and/or
after work as not provided for a substantial
noncompensatory reason. Thus, the employee must
include the value of such meals in gross
income.11 Meals provided to
restaurant employees are a common exception. A
restaurant employee may exclude from gross income
the value of free or discounted meals consumed
immediately before work, during work, or immediately
after work, as Example 1 illustrates.12

Example
1:A
is a restaurant server who works from 8 a.m. to 5
p.m. each workday. His employer allows him one hour
for a meal during his shift. The restaurant manager
allows A
to eat breakfast free at the restaurant before he
starts work. The restaurant does not require A
to eat breakfast at the restaurant; however, he must
eat lunch at the restaurant. Because A
is a food service employee, he may exclude from
gross income the value of these breakfasts and
lunches the restaurant provides.

However, if
a restaurant employee eats a meal free at the
restaurant on a nonworking day, the employer must
include the value of the meal in the employee's
wages and report it on Form W-2, Wage
and Tax Statement.13 The employer must keep
adequate records of the value of any meals included
in the employee's wages.14 The employer may treat
the value of taxable noncash fringe benefits as paid
on a per-pay-period, quarterly, semiannual, annual,
or other basis.15 The employee would
have to include the value of the meal in gross
income, as Example 2 shows.16

Example
2:A
came in to the restaurant on his day off to see what
his shift schedule would be for the next week. While
he was there, he ate lunch. The FMV of the lunch was
$12. The restaurant provided the lunch to A
without charge. A's
employer should include the $12 value of the free
meal in A's
wages reported on Form W-2.

If A's
employer fails to do so, A
could request an amended Form W-2 from his employer.
If his employer will not provide him with an amended
Form W-2, A
should add $12 to the amount reported as wages on
line 7 of Form 1040, U.S.
Individual Income Tax Return, and attach an
explanation.

However, a restaurant employee
might be able to exclude from income the discount on
discounted meals consumed on nonworking days as a
qualified employee discount.17 To provide a qualified
employee discount, the restaurant must not sell the
meal below its cost of goods sold.18 Example 3 illustrates
the exclusion of discounted meals as a qualified
employee discount.

Example
3:G
works as a bartender at a steakhouse. She may eat
meals without charge immediately before her shift,
while on break during her shift, and immediately
after her shift. She excludes the value of these
free meals under Sec. 119. On her nonworking days,
G
may eat meals at the restaurant for a 50% discount.
Assume that the gross profit percentage at the
steakhouse is 60%. Because the discount does not
exceed the gross profit percentage, G
may exclude all the discounts she receives as a
qualified employee discount under Sec. 132.

What if the employer would have provided a meal
to an employee during working hours for a
substantial noncompensatory business reason, but
work duties prevented the employee from eating? In
that case, the employee may exclude from gross
income the value of a meal provided by the employer
immediately after working hours.19

Meals During Working Hours

An
employee may exclude from gross income the value of
meals furnished by an employer during working hours
if the reason is to have the employee available for
emergency calls during the meal period.20 Likewise, an employee
may exclude the value of meals furnished by an
employer during working hours if the reason is that
the employer allows only a short meal period, such
as 30 to 45 minutes, and the employee could not be
expected to eat elsewhere in that time.21 Such a circumstance
may arise when the employee's peak workload occurs
during normal meal hours, as Example 4 shows.

Example
4: A credit card company employs D,
a customer service agent, from 8:30 a.m. to 5 p.m.
D
has a 30-minute lunch period, which management
strictly enforces. The lunch period coincides with
the peak workload for the employee. Management
allows D
to eat in the company's cafeteria free. If he left
the premises for lunch, he could not return to work
within the 30-minute lunch period allowed. D
may exclude the value of the free lunch from gross
income.22

However, meals
provided by the employer do not qualify for the
exclusion if they are not provided for the
employer's convenience (e.g., if the purpose of the
short meal period is to allow employees to leave
earlier in the day).23

An employee
may exclude from gross income the value of meals
furnished by an employer during working hours if the
employee could not otherwise obtain proper meals
within a reasonable meal period. This situation
could occur if eating facilities near the employer's
location are insufficient, as Example 5
illustrates.25

Example
5: A manufacturing company has a factory in a
rural area where no eating facilities are nearby.
The company maintains a cafeteria on-site where it
provides its employees with free meals during
working hours. The employees have no gross income
from the free meals they eat during working hours at
the company cafeteria.

Other
Factors

If an employer provides meals to
substantially all its employees for a substantial
noncompensatory business reason, then the law treats
the meals provided to other employees as provided
for a substantial noncompensatory business reason,
as Example 6 shows.26

Example
6: A large hospital has an on-site cafeteria
where all of its 250 employees may eat free during
working hours. Of the 250 employees, 234 are
provided the meals because they must be available
for emergencies. Because substantially all of the
hospital's employees must eat at the cafeteria, all
of the employees may exclude the value of the meals
from gross income.

If the employer provides
meals for a price and the employee may or may not
purchase the meals, the law does not treat such
meals as provided for the convenience of the
employer.27 Thus, if the FMV of
the meals exceeds the cost paid by the employee, the
employee must include the difference in gross
income, unless the discounted meals qualify for
exclusion as a qualified employee discount under
Sec. 132. Example 7 ­illustrates this rule.

Example
7: A company provides a cafeteria where
employees may purchase meals at a discount of 40%
from the meals' FMV. Employees do not have to eat in
the cafeteria. The company allows family and friends
of employees to eat with them in the company
cafeteria, but the family and friends must pay full
price. Thus, the receipt for employees shows the
full price, the 40% discount, and the net price
paid. The company's accounting system tracks the
cumulative discounts received by employees and
reports them on each employee's Form W-2. One
employee, M,
ate 250 meals at the company cafeteria during the
year. She received an average discount of $4 per
meal. Her gross income will include $1,000 (250
× $4) for the
value of the meal discounts she received.

What if an employer deducts a fixed amount from
the employee's compensation for the cost of meals
the employer provides? The employer does not include
such a reduction in pay in the employee's gross
income—it is a tax-free reduction in compensation.
The employee determines whether the exclusion for
the meals under Sec. 119 applies by using the rules
of Regs. Sec. 1.119-1(a)(2), as Example 8
shows.28

Example
8:G
works for an oil pipeline company on a project in a
remote area of Alaska. His employer provides meals
and lodging to the pipeline workers at a camp
because no other facilities are available. G
pays $75 per week to the employer through a payroll
reduction for the meals and lodging. G
determines that the meals are furnished for the
convenience of his employer in accordance with the
rules of Regs. Sec. 1.119-1(a)(2). He does not
include the $75 per week withheld from his paycheck
in gross income. G
also excludes from gross income the value of the
meals and lodging provided by the employer.29

Sec. 119
applies to meals provided by an employer in kind. It
does not apply to a cash meal allowance. An employee
must include a cash meal allowance in gross income
to the extent that such an allowance is
compensation, as Example 9 shows.30

Example
9:B
works for a large Western state as a state fire
marshal. He travels extensively within the state,
but he is usually home late each night. He considers
the entire state as the business premises of his
employer. Because of his late hours, he generally
needs to eat at a restaurant before he arrives home.
The state gives him a cash meal allowance. He must
include the allowance in his gross income. He may
not deduct the cost he pays for meals unless he is
away from home long enough to require rest and
sleep.31

If an employee
may choose to receive additional cash compensation
in lieu of meals and the employee chooses the meals,
he or she must include the value of the meals in
gross income. However, if an employee refuses to
accept free meals provided in kind by the employer,
he or she does not necessarily have to include the
value of the refused meals in gross income.32 No additional guidance
regarding the tax treatment of an employee's refusal
to accept meals provided in kind by the employer is
available in Regs. Sec. 1.119-1.

Conditions
for Exclusion of Lodging by an Employee

When an employer provides housing or lodging for
an employee, the employee may be able to exclude the
value of the lodging from gross income. The lodging
must meet three tests: (1) The lodging must be on
the employer's business premises; (2) the employer
must provide the lodging for the employer's
convenience rather than for the employee's
convenience; and (3) the employer must require the
employee to accept the lodging as a condition of
employment. Thus, the employee must need to live in
the lodging to be able to perform the duties of the
employment, as Example 10 shows.33

Example
10:J
is an employee of an apartment building, performing
maintenance and repairs. His employer requires him
to live in the apartments to be able to provide
emergency repair services 24 hours per day and
therefore provides J
with free lodging there.

J
meets all three tests: (1) The lodging is on the
employer's premises; (2) it is for the employer's
convenience; and (3) J
must live there to be on call 24 hours a day as a
condition of his employment. Therefore, he may
exclude the value of the free lodging from gross
income.

For the Convenience of
the Employer

The terms of an employment
contract or state statutes that describe terms of
employment are not determinative of whether meals or
lodging are for the employer's convenience.34 If a state statute or
employment contract treats employer-provided lodging
as compensation, the employee may still exclude the
value of the lodging from gross income for federal
income tax purposes if the lodging meets the three
tests. The employee must determine whether he or she
may exclude the value of lodging from gross income
by an objective analysis of all relevant facts and
circumstances.35

An employer's
subjective intent is not conclusive of whether an
employee may exclude the value of lodging furnished
by an employer from the employee's gross income, as
Example 11 illustrates.36

Example
11:S
is a state employee. The state institution where she
works requires her to be available for duty at all
times. The state furnishes S
with free meals and lodging at the institution. The
applicable state statute considers the meals and
lodging as compensation and includible in gross
income for state income tax purposes.

Despite the state statute, S
may nevertheless be able to exclude the value of the
meals and lodging from gross income for federal
income tax purposes. She must carefully examine all
the facts and circumstances in determining whether
the tests of Sec. 119 are met for the meals and
lodging.

What if an employer allows the
employee to choose between free lodging or
additional cash compensation and the employee
chooses the free lodging? In that case, the employee
must include the value of the free lodging in gross
income, as Example 12 shows.

Example
12: Assume that S
in the previous example had a choice between
accepting the free lodging or a cash allowance in
lieu of such lodging. If S
chooses the cash allowance, she may live anywhere in
the vicinity of where she works. S
chose the free lodging on the employer's premises.
S
must include the value of the lodging in gross
income. Under these circumstances, the lodging is
not necessary for S
to perform the duties of her position.37

If lodging
satisfies the three tests, the employee excludes the
value of the lodging from gross income. If the
employer charges the employee for such lodging and
deducts a fixed amount from the employee's
compensation for lodging, then the employee does not
include the reduction in pay in gross income.
Likewise, the employee may exclude any discount from
the FMV of the lodging from gross income.

If
the lodging does not satisfy the three tests, the
employee must include the FMV of the lodging in
gross income, regardless of any amount the employer
deducts from the employee's pay for the lodging.
Absent evidence to the contrary, the law deems the
FMV of the lodging to be the amount deducted from
the employee's pay for lodging.38

Employer's Business Premises

The requirement for the lodging to be on the
business premises of the employer generally means at
the place of employment. This could include the
employer's home, for a domestic servant, or property
leased by the employer for the business
purpose.39 It could mean other
property owned by the employer where the employee
performs a significant portion of his or her duties.

In Lindeman,40 a hotel manager lived
in a house within the perimeter of the hotel
property. The manager performed a significant
portion of his duties in the house. He was on call
24 hours a day. Under these facts and circumstances,
the Tax Court allowed the exclusion for lodging.

However, in Anderson,41 a motel manager lived
in a house owned by the employer. The house was two
blocks from the motel. The employer provided the
home free, paid for its utilities, and provided
staple grocery items. The employer did so to avoid
any loss of revenue that would result from the
manager's occupying a motel room. The manager was on
call 24 hours a day. However, because the manager
did not perform a significant portion of his duties
in the house, and because the house was not a
significant place of business for the employer, the
Sixth Circuit did not allow the exclusion for meals
and lodging. Thus, the manager had to include the
value of the lodging in gross income.

The
employer of an engineer on the Trans-Alaska Pipeline
built permanent homes and modular homes in the
construction area because there was insufficient
housing available elsewhere. The employer provided
the housing free to employees. The employer then
included the value of the lodging in the employees'
wages and withheld tax on it. The engineer employee
deducted the value of the housing included in his
wages as employee business expenses. The Tax Court
found the employer provided the housing for the
employer's convenience, and the employee had to
accept the lodging as a condition of
employment.42

However, for
the taxpayer's lodging to be considered as within
the employer's business premises, those premises
would have to encompass the entire town, an overly
broad view of the term, the court said. Because the
taxpayer did not perform a substantial amount of his
duties in the home but rather at the employer's oil
pipeline terminal, the Tax Court found the lodging
was not on the employer's business premises.
Consequently, the taxpayer had to include the value
of the lodging in gross income and could not deduct
it as a business expense.

Foreign Camps

In the case of an
employee who receives lodging from an employer in a
camp in a foreign country, the law will treat the
camp as the business premises of the employer.43 A camp is lodging the
employer provides the employee for the employer's
convenience. The employer provides the housing in
the camp because the area where the employee works
is remote and housing is not otherwise available
within a reasonable commuting distance. The lodging
must be as close as practicable to the place where
the employee works. The employer must provide the
lodging in a common area that is not available to
the general public for lodging. The camp must
accommodate 10 or more employees.44

Factors to
determine a reasonable commuting distance include
the time and distance of the commute, the quality of
the roads, the customarily available transportation
at the time of day when an employee must commute,
and the geographic accessibility of the place where
the employee works.45 The definition of
satisfactory housing depends on facts and
circumstances including the size and condition of
lodging available on the open market, the
availability and quality of utilities in such
housing, and the adequacy of such other available
lodging to protect the employee from environmental
conditions. Whether housing is satisfactory is not
determined solely by conditions of its general
environment, nor does it depend on the employee's
income level.46

Facts and
circumstances to consider in determining the
availability of satisfactory housing include:

The number of housing units available
on the open market in relation to the number of
the employer's employees requiring such housing;

The cost and/or quality of housing
available on the open market;

The
presence of civil insurrection or warfare in the
area where other available housing is located and
whether those disturbances would subject U.S.
citizens to an unusually high risk of harm or
property loss.47

If the
foreign government requires the employer to provide
housing other than what is available on the open
market, or an unrelated third party awarding work to
the employer requires the provision of housing the
party specifies, satisfactory housing is considered
to be unavailable. If these requirements apply
primarily to U.S. employers and not to a significant
number of third-country employers, the previous
conditions will not automatically signify that
satisfactory housing is unavailable.48 The determination of
availability would revert to a
facts-and-circumstances test.

To qualify as
a camp, any common area or enclave must not be
adjacent to or surrounded by substantially similar
housing available to the general public. However,
the law considers two or more common areas or
enclaves that house employees who work on the same
project to be one common area for the purpose of
determining whether each can normally accommodate 10
or more employees.49

Campus
Housing

In general, and as stated above, for
an employee to exclude from gross income the value
of lodging provided by the employer, the employer
must require the employee to accept the lodging on
the employer's business premises as a condition of
employment.50 Some educational
institutions furnish lodging to their employees.
Educational institutions generally do not require
their employees to accept such lodging as a
condition of employment. Thus, an employee of an
educational institution who receives subsidized
housing is usually unable to meet the requirements
for exclusion.

However, Sec. 119(d) provides
that employees of an educational institution may
exclude from gross income the value of qualified
campus lodging that the educational institution
provides them.51 Qualified campus lodging
is lodging on or close to campus that is provided by
the educational institution as a residence for the
employee and the employee's spouse and dependents.

The exclusion does not apply when an employee
pays inadequate rent for such housing. In that case,
the employee would include in gross income all or a
portion of the value of the housing provided, based
on the inadequate-rent calculation.52

Inadequate rent is
the lesser of (1) 5% of the appraised value of
qualified campus housing, or (2) the average rent
paid by individuals for similar housing provided by
the institution,53 minus the rent paid by
the employee for the housing during the calendar
year.54 The educational
institution must determine the appraised value as of
the close of the calendar year in which the tax year
begins or, in the case of a rental period not
greater than one year, anytime during the calendar
year in which the rental period begins.55 Example 13 illustrates
the calculation of the amount that an employee of an
educational institution who receives lodging from
the institution must include in gross income.

Example
13: A large state university owns a house on
campus it rents to Professor T.
The house is currently appraised at $180,000, and
similar properties rent for $1,400 per month. The
university charges Professor T
$600 per month in rent. How much is includible in
Professor T's
gross income in relation to his rental of the
property from the university?

Professor
T
must include the lesser of (1) 5% of $180,000 or (2)
$1,400 per month, minus the $600 per month rent that
he pays. The calculation is: 5% ×
$180,000 = $9,000 per year; $9,000
÷ 12 months = $750 per month.
Because $750 per month is less than $1,400 per
month, the calculation is $750 − $600 = $150 per
month; $150 per month × 12 months =
$1,800. Professor T
must include $1,800 per year in gross income as a
result of the bargain rental from the university.

An educational institution is an educational
organization that maintains a faculty and curriculum
and normally has a body of enrolled students at the
place where its educational activities occur.56

The term
"educational institution" includes not
only a college or university, but also an academic
health center. An academic health center is an
entity that carries on medical care, medical
education, and/or medical research.57 To qualify as an academic
health center, the entity must also receive payments
under Section 1886 of the Social Security Act58 relating to graduate
medical education. It must have as one of its
principal purposes or functions providing and
teaching basic and clinical medical science and
research with its own faculty.59

Tax-Free
Housing to a Partner From a Partnership

May a partner receive tax-free housing provided
by the partnership if the partnership requires the
partner to live there to carry out duties necessary
to receive a guaranteed payment from the
partnership? Sec. 119 does not address lodging
provided by a partnership to a partner on the
partnership's business premises for the
partnership's convenience. Nevertheless, in some
situations a partnership may view its transactions
with a partner as being with someone who is not a
partner.

A partner has an equity interest in
the partnership. The tax law generally treats a
partner as self-employed and not as an employee of
the partnership. If a partner engages in a
transaction with a partnership in a capacity other
than as a partner, the law will deem the transaction
to be not between a partner and a partnership.60 This situation could
occur in "the rendering of services by the
partnership to the partner or by the partner to the
partnership."61 Thus, if the partnership
reasonably believes it engaged in the transactions
with the partner to provide free housing for the
partner so the partner could carry out the business
duties of being a partner, the partnership might
view the partner as an employee for such purposes.
Then, the partnership would have to satisfy itself
that it meets the Sec. 119 requirements for
excluding the value of the lodging from the
partner's gross income.

Case
Law Supporting Exclusion by a Partner

In
Armstrong
v. Phinney,62 the Fifth Circuit ruled
that a partner could act in a capacity other than as
a partner under Sec. 707(a) for purposes of the
exclusion for meals and lodging under Sec. 119. The
court noted that Congress rejected the aggregate
theory of partnership taxation when it enacted the
Internal Revenue Code of 1954. The court cited Sec.
707(a) as authority for its conclusion of law that a
partnership could treat a partner as an employee for
purposes of Sec. 119, stating:

[W]e have found nothing
to indicate that Congress intended that this section
[Sec. 707] is not to relate to section 119.
Consequently, it is now possible for a partner to
stand in any one of a number of relationships with
his partnership, including those of creditor-debtor,
vendor-vendee, and
employee-employer. Therefore, in this case the
government is not entitled to a judgment as a matter
of law.63

The court
remanded the case so that the trial court could make
findings of fact regarding the application of Sec.
119, given this conclusion of law.

This case
is the best one on which a partnership and partner
may rely in arguing that Sec. 119 should apply to a
partner. This case would provide a partner with only
persuasive authority in circuits other than the
Fifth Circuit; it is not binding precedent in the
other circuits.

In addition, in Papineau,64 the Tax Court held that
where a limited partnership required a general
partner who was the operator of a hotel to live at
the hotel as a part of his job, the operator had no
gross income from the value of the free lodging. The
Tax Court also allowed the hotel to deduct the cost
of the meals and lodging as ordinary and necessary
business expenses. The Tax Court based its decision
in this case on the Internal Revenue Code of 1939,
finding that the value of the meals and lodging was
not income to the taxpayer because as a partner he
was working for himself and could not be considered
an employee in the sense of providing services to
another. He therefore could not compensate or create
income for himself by furnishing himself meals or
lodgings.

In Wolfe,65the Tax Court followed
its decision in Papineau,
even though the partnership reduced its gross
receipts by the cost of the meals and lodging it
furnished to the partner. The court declined to
address whether the IRS should have disallowed the
partnership's reduction of gross receipts because
that issue was not before the court.

Case Law Opposing the Exclusion by a
Partner

However, taxpayers have lost similar
cases. In Doak,66 the Fourth Circuit held
that two married taxpayers who operated a hotel as a
partnership could not deduct the cost of their meals
and lodging at the hotel as business expenses
because they operated the hotel as a partnership;
they were not employees of the hotel. However, the
court noted that if the law treated a partnership as
a separate taxable entity (and not as an aggregation
of the partners individually), and the partners as
employees, the cost of the meals and lodging
provided to the partners might be deductible as a
business expense.

In Moran,67 the Tax Court, on a
rehearing following reversal and remand of its
earlier decision by the Eighth Circuit,68 held that a partnership
had to reduce its deductible business expenses by
the amount of the partners' personal expenses it
paid to the partners rather than by the value of the
lodging received by the partners.

In Robinson,69 the Third Circuit ruled
against the taxpayers. However, the court stated
that if the taxpayers had incorporated and were
employees of the corporation, the expenses would be
deductible under the convenience-of-the-employer
rule. The dissent in the case observed that the law
penalized a business owner who was not incorporated.

In Wilson,70 the taxpayer was a
managing partner in a partnership. He lived in a
house on a ranch the partnership owned and performed
work there on behalf of the partnership. The
partnership provided food and housing to the
taxpayer as a part of his compensation. The taxpayer
did not include the value of the food and housing in
his gross income. The taxpayer argued that living on
the ranch was a business necessity under the
circumstances. The Court of Claims ruled the
taxpayer failed the convenience-of-the-employer test
because the partnership could not be the employer of
its partners. The court cited the decisions in Doak,
Moran,
and Robinson
as support for its decision. Thus, the taxpayer had
to include reimbursements for meals received from
the partnership in gross income. The court also held
the taxpayer could not deduct the cost of the meals
because they were a personal expense.

In
Briggs,71 the taxpayer was a
managing partner in a partnership. The partnership
agreement required him to live at a hotel and manage
it as a business. The issue was whether the
partnership could deduct the taxpayer's expenses of
living at the hotel. The District Court for the
District of Colorado held the expenses were
deductible. The Tenth Circuit reversed the trial
court's decision and held the expenses were not
deductible, based on the decisions in Doak
and Moran.

Revenue Ruling Opposing the
Exclusion

In 1953, the IRS ruled that a
partnership had to reduce its deductible business
expenses by the personal expenses it paid for a
partner and increase the resident partner's share of
the partnership's income by the same amount.72 The IRS based this ruling
on its nonacquiescence to the decision in Papineau.
This ruling was issued before Congress enacted the
Internal Revenue Code of 1954.

Conclusion

Sec. 119 directly applies only to employees. As
long as meals and lodging provided to an employee
meet the three tests, the employee will be able to
exclude the value of employer-provided meals and
lodging from gross income. In contrast, the tax law
generally treats partners as self-employed owners of
a business rather than employees, limiting a
partner's ability to take advantage of this
exclusion from gross income. However, the Fifth
Circuit has allowed a partnership to treat a partner
as an employee of the partnership under Sec. 707(a)
for purposes of Sec. 119 if the partner is acting in
a capacity other than as a partner. Several circuits
have issued contrary opinions.

4Meals provided
to cowhands by their employer while herding the
employer's cattle are considered to be furnished on
the employer's business premises. The exclusion
applies even if the cowhand is working on leased
land not owned by the employer (Regs. Sec.
1.119-1(c)(1)).

Alan
D. Campbell is an associate professor
of accounting at Troy University in
Montgomery, Ala., and Dena
S. Mitchell is an assistant professor
of accounting at Troy University in Troy, Ala.
For more information about this column,
contact Prof. Campbell at alancampbell@elmore.rr.com.

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